METHODS OF PAYMENT IN FOREIGN TRADE

METHODS OF PAYMENT IN FOREIGN TRADE

For the payment of debts and settlement of accounts in the foreign trade, both the organization and instruments are provided by the banks with their branches and correspondents all over the globe.

1. For bank notes and coins the banks issue Travelers Cheques which can be mainly used for traveling and personal expenses. Credit Cards also meet the same needs. The banks provide an international system of Bank Transfers in place of the cheques system and, in case of urgency, the payment can be made by Cable Transfer.

2. The oldest method of payment in foreign trade is the Foreign Bill of Exchange which differs from the Inland Bill in two important points: the payment method and the number of copies. The Foreign Bill of Exchange is made payable either at sight, i.e. the day when it is presented to the drawee, or at a given period after sight(30, 60, 90 days after sight or even later) and it is drawn in sets of two or three copies.

In case of dishonour, the Foreign Bill of Exchange must be protested in order to protect the creditor's rights in the Bill.

The due date of the Bill is determined by the number of days after sight, e.g. 30 days after sight. The specimen given is the original Bill which is called First of Exchange having two more copies.

The drawee accepts or pays the Bill and can either hold it until maturity or have it discounted in his bank, thus recovering the use of his capital.

When the Shipping Documents (the Bill of Lading, Insurance Policy and Invoice) are attached to the Bill of Exchange they create a Documentary Bill of Exchange and it is then sent to the bank for collection.

Depending on the arrangements between the importer and exporter, the documents which form the title to the goods can be handed over either against payment (D/P) or against acceptance of the Bill (D/A).

The bank is generally instructed not to present the Bill before the merchandise has actually arrived. On the other hand, if a Bill is drawn 60 or 90 days after sight and the documents are to be released only against payment, the importer can get possession of the documents by paying earlier, e.g. 30 days after sight.

Since the disadvantage of this method is that the exporter has to wait quite a lot before he receives the money, he often approaches his bank for an advance on the shipment which is generally granted on the signing of a Letter of Hypothecation,

For contracts that imply a large amount of money and time a Letter of Credit (L/C) is preferred as a secure means of payment. The correspondent bank will be then prepared to accept the Bill on behalf of the exporter; the importer consequently draws the Bill on the bank and not on his customer thus establishing an Irrevocable Documentary Credit which gives the exporter a complete protection. The Irrevocable means that the Letter of Credit cannot be changed or cancelled without the agreement of all parties.

Text Comprehension

1. Vocabulary

Payment =plata

Bank note = bancnota

Coin =moneda

Payable at sight = platibil la vedere

Drawee = tras, platitor

In case of dishonour = in caz de neplaa

Bill of lading= conosament , foaie de expeditie

Bill of exchange = cambia , trata

Merchandise = marfa

Letter of credit = acreditiv

To cancel= a anula

Irrevocable = irevocabil

2. Answer the following questions?

Which payment methods are given in the text for export /import transactions?

How does the Foreign Bill of Exchange differ from the Inland Bill  of Exchange ?

Explain how the letter of credit works and what are the advantages of such a payment method?